Investors, businesses get jitters amid reports Hizbullah will take over country if its officials are named
Investors, businesses and consumers are signaling growing fears that Lebanon’s surging economy is imperiled by the threat of a conflict between Hizbullah and the country’s pro-Western government over the investigation into former Prime Minster Rafik Hariri’s 2005 assassination.
Official figures show the economy is on track for another year of strong growth, but many economists say the data don’t capture the nervousness that has developed since last summer, when reports began circulating that the Special Tribunal for Lebanon would indict Hizbullah officials for the killing. Hizbullah has regularly issued warnings that indictments could lead to “instability.”
“Our indicator of consumer confidence has been declining since July on worries about the political outlook,” Nassib Ghobril, chief economist at Byblos Bank, told The Media Line. “We know there are some companies that had expansion plan but are now taking a wait-and-see approach. There’s been a decline in the stock market since the summer, which has reflected political sentiment more than underlying performance.”
Since Lebanon emerged from a 2008 political deadlock that brought it close to civil war, gross domestic product has expanded an average of 9% a year, led by booming tourism and construction sectors and inflows of capital from abroad. Merrill Lynch revised upwards its forecast growth to 8% in 2010 and 5.9% next year.
“Economic activity seems to have slowed down relatively in August-September,” Merrill said in a November 17 report. “While this slowdown can partially be attributed to
Ramadan, increased concerns on politics might have been at play as well.”
Byblos Bank expects GDP to show annualized growth of 4% for the second half of this year, half the pace it expanded in the first half amid growing uncertainty over the country’s future. Merrill warned of “volatility” in Lebanon before an agreement is brokered between the two sides by outside governments, Merrill said. “Should it remain contained, politics and economics can conveniently diverge,” it added.
Political analysts have warned that a standoff between the ruling March 14 coalition and Hizbullah over how to respond to the expected STL indictments could lead to the collapse of the government and violent conflict. Al-Akhbar, a Beirut daily close to Hizbullah, reported Tuesday that the group will act on plans to take over Lebanon, if an indictment issued.
The STL hasn’t said when it will issue indictments, but they are widely expected to act in the next few weeks. The Lebanese Shiite militant organization has more men under arms that the Lebanese army and fought a bitter one-month war with Israel in 2006.
Standard & Poor’s affirmed Lebanon’s B/B credit rating this week, but it warned that the STL indictments could cause Hizbullah to bolt the government. But some economists, like Marwan Barakat, chief economist at Audi Bank, say Lebanon will be able to weather the current political crisis as it has others.
Lebanon has suffered political traumas on a regular basis that would send other economies reeling, including the 2005 Hariri assassination, war with Israel in 2006 and the 2008 political standoff when Hizbullah briefly dispatched it fighters through Beirut and threatened to bring down the government. On top of that, the economy is weighed down by a debt-to-GDP ratio of close to 140% at a time when investors are especially alert to such parameters.
“Recent economic history has shown Lebanon is resilient to such shocks,” Barakat told The Media Line. “If you go back four or five years, the country was able to get out of them. Even during those shocks, we didn’t have outflows of massive capital because of the perception that it will be contained.”
One reason is that Lebanon’s conservative banking industry avoided the lending excesses that led to the global financial crisis and has thus enjoyed an influx of foreign capital from investors, particular expatriate Lebanese. Barakat said inflows reached $20 billion in 2009 and will nearly match that level this year.
Merrill Lynch forecasts that public debt will decline to 133% of GDP at the end of 2010 and to 131% in 2011.
But, even without the threat of violence or political upheaval, S&P and Merrill Lynch both warned that political paralysis that has been created by the STL controversy is blocking progress on key economic reforms. Lebanon’s 2010 budget awaits approval and the 2011 remains blocked as are privatization and other structural reforms. Barakat, however, said he is confident that the economy can manage even if the steps are delayed.
“Definitely it’s important for country with high debt ratio to go into structural reforms to ensure a soft landing in pubic finance positions, which is vulnerable to the economy,” he said. “Lebanese debt is held by the Lebanese themselves, which avoids the risk of massive exit. And, you have a very high level of reserves at the central bank.”